Financial advice – its tough

Financial planning advice is a slow, expensive and, it seems, unprofitable business.

Firstly, it can take weeks or even months before a comprehensive statement of advice is ready. Secondly, research conducted by KPMG and commissioned by the Financial Services Council found the average cost of providing comprehensive financial planning advice is $5,335 a client, while the average cost charged was $3,660. The more advice they give the quicker they go out of business.

A big chunk of adviser costs are the result of compliance requirements, the consequence of past sins for which most advisers are innocent. The big financial institutions were not so innocent. According to ASIC;

Six of Australia’s largest banking and financial services institutions have paid or offered a total of $1.86 billion in compensation, as at 30 June 2021, to customers who suffered loss or detriment because of fees for no service misconduct or non-compliant advice.

Current planning software doesn’t seem able to provide the efficiency advisers need to be profitable.

Robo advice is a relatively quick and inexpensive way to invest. Answer a few questions on the Robo Adviser’s site and your money is working for you in a selection of index funds, at a substantially lower cost than an active fund manager.

Robo advisers however may also be struggling to make a buck. The cost of acquisition make it hard to make a profit on small accounts. Michael Kitces, Head of Planning Strategy at Buckingham Wealth Partners points out;

An average account size of $20,000 produces revenue of just $50 per year at a 0.25% fee schedule. Even if robo-advisors are managing to achieve a 98% monthly retention rate and facing just 2% monthly churn, their annual retention rate will be barely 80%, which equates to projected lifetime client revenue of just $250 cumulatively.

Its no wonder advisers are leaving the industry. On the 7th October, Adviser Ratings reported there were 18,905 advisers, down from 28,000 at the industry’s peak. They predicted numbers could be as low as 13,000 by the end of 2023. Can any industry lose two thirds of their professionals?

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